Humans: the missing link in economic analysis of terror

When the markets ignored 2011's biggest terror attack in the commercial capital of India on July 13 that left 19 people dead and 130 injured, nobody blinked an eye. It's only human lives that have been lost, not profits, so why should the markets weep? So, when the Bombay Stock Exchange Sensitive Index moved up 22 points a day after the three blasts, it was really business as usual. This rise was in tune with the rise of 0.7% the day after the far deadlier and brazen 26/11 attack.

The markets represent the combined intelligence of a nation's most brilliant speculators, investors and intermediaries. Unlike say the Planning Commission, where a handful of "experts" put together mega plans for India every five years for the rest of the country to follow, stock markets are a far more democratic voice of money. The smallest change in economic implications are reflected in seconds — RBI increasing policy rates, implosion of Greece or Spain, Union Budgets. Deaths, destruction, tragedies do not belong here.

A month after 9/11, I was touring the US on a fellowship under which I met the top minds in government, business and finance. At that point, all of them were clueless about what was going on and its impact — unlike in say Palestine or even India, this was probably the first meeting of the world's most powerful nation with this civilisation's most powerful enemy. The closest I got to a political economy analysis was when I interviewed Guy Tozzoli, president of the World Trade Towers Association — and who because he was late for work lived to tell his tale: "When nations trade, they cannot fight."

In the 10 years since, economic research has come a long way and has begun to analyse terror and its economic impact a little more deeply. Some of the conclusions show that the markets know what they are doing. "Though less frequently targeted, poor countries are hurt more by attacks while larger and more diversified economies, as well as democracies, seem to suffer less," an October 2010 paper by Fernanda Llussa and Jose Tavares, Which terror at which cost? On the economic consequences of terrorist attacks, says. The post-attack markets behaviour in India substantiates this analysis.

For research junkies, however, there is good news. During the past decade, economic research has evolved beyond the banal trendcasting that merely captures the low-hanging fruits — take the number of incidents and casualties and map them against the impact on markets. Already, we see the impact on GDP growth in general and tourism, foreign direct investment, foreign trade in particular, coming into the picture.

Terrorism and the World Economy, an August 2007 paper, for instance, analyses the impact of capital allocation across countries even if the risk is low. In it Alberto Abadie and Javier Gardeazabal argue that in addition to increasing uncertainty, terrorism reduces the expected return on investment. "As a result, changes in the intensity of terrorism may cause large movements of capital across countries if the world economy is sufficiently open, so international investors are able to diversify other types of country risks."

But it is the human cost that interests me. A November 2004 paper, Calculating tragedy: assessing the costs of terrorism by Bruno S Frey, Simon Luechinger and Alois Stutzer, proposes a new approach to calculate the cost of terror. Based on "life satisfaction or subjective well-being data", the paper suggests that by incurring large utility losses, "Individuals would need to receive substantial increases in income in order to compensate for the harm inflicted by terrorism." Employers, please note.

Because it impacts markets, terror analysis has also moved out of the lonely university towers to the commercial world of consultants. A March 2009 report by Watson Wyatt suggests that among the six markets of Colombia, India, Spain, Thailand, UK and US that they analysed, "India is the one which seems to respond most mildly to a terrorist event, with only 5% of the attacks having a significant and negative impact in market returns in the day of the event."

But research on terror and markets has a very long way to go before it is able to capture the cry of a family that has lost its member. What is it waiting for — a larger cohort?